Corporate governance guidelines (“CGGs”) are a relatively recent addition to the corporate governance framework of public companies. In 2003, in response to accounting scandals at Enron Corporation and several other large public companies, the NYSE created rules to improve the corporate governance practices of companies listed on the exchange. As part of that initiative, the NYSE directed listed companies to adopt CGGs and to post their CGGs on their company websites.
Under Section 303A.09 of the NYSE Listed Company Manual, companies are required to disclose in CGGs information on seven specific corporate governance topics: director qualification standards, director responsibilities, director access to management and independent advisors, director compensation, director orientation and continuing education, management succession, and annual performance evaluation of the board. The NYSE hoped that requiring disclosure of corporate governance practices would “promote better investor understanding of the company’s policies and procedures, as well as more conscientious adherence to them by directors and management.”
I was curious about the types of information that public companies disclose in their CGGs. Presumably, companies include information on the topics required by the NYSE, but what is the quality of information? Is it boilerplate or more meaningful? Do public companies tend to disclose – and adopt – the same corporate governance practices? Do public companies disclose more information in their CGGs than is required by the NYSE? If so, what information? What corporate governance practices are not being disclosed in CGGs? Are public companies required to disclose if the board deviates from the corporate governance practices disclosed in the CGGs? To answer these questions, I reviewed and analyzed the CGGs of the 50 largest public companies in the United States as set forth in the Fortune 500.
My review revealed great variation in several of the seven corporate governance topics mandated by the NYSE. It also revealed that, although all public companies included additional information in their CGGs, the “voluntary” content largely consisted of corporate governance information that public companies are already required to disclose in their proxy statements.
Most importantly, I discovered that CGGs generally failed to disclose information on today’s most critical corporate governance issues. For example, over the last 10 years, activist shareholders and institutional investors have demanded more of a voice in company decisions. In addition, boards now face difficult questions relating to environmental and social issues (“ESG”). Boards are also under increasing pressure to manage the corporation to benefit all stakeholders, not just stockholders. Although these are significant corporate governance issues, CGGs are typically silent on these topics.
To address this, I recommend that the NYSE amend Section 303A.09 in two important ways. First, listed companies should be required to disclose more information in their CGGs. Specifically, they should include a new section on “Shareholder Rights,” with disclosure of the following topics:
- Whether the company’s common stock has equal voting rights;
- Whether the entire board stands for election at each annual meeting;
- Whether a majority vote is required to elect a nominee to the board of directors;
- Whether shareholders can call special meetings;
- Whether shareholders can act by written consent;
- Whether shareholders have access to the company’s proxy; and
- Whether shareholder proxies are confidential.
Companies should also be required to disclose basic information about the company’s ESG policies and a statement of corporate purpose (i.e., whether the board is managing the company for the benefit of stockholders or stakeholders). Finally, companies should also be required to disclose any deviations from the corporate governance practices set forth in their CGGs.
Second, I recommend that the NYSE adopt a new “disclose or explain” approach to CGG disclosure. Rather than simply requiring listed companies to disclose their corporate governance practices, the NYSE should require companies to disclose whether they have adopted a particular corporate governance policy, and if they have not, why not. For example, under the current rule, companies are required to disclose whether they limit the number of additional boards a company director may serve on. If they do not have a policy, they are not required to explain that decision. Under my recommendation, if a company has not adopted a so-called “overboarding” policy, it would be required to explain why. The increased disclosure and the “disclose or explain” approach will ensure that shareholders are better informed and will lead to improved corporate governance at public companies.
Corporate governance challenges faced by public company boards today have changed dramatically since the NYSE rule was adopted in 2003. It is time for the NYSE to revisit its rule to improve the effectiveness of CGGs.
 N.Y. Stock Exch. Corp. Accountability and Listing Standards Comm., Report and Recommendations 19 (2002), https://www.iasplus.com/en/binary/resource/nysegovf.pdf.
This post comes to us from Professor Jennifer O’Hare at Villanova University Charles Widger School of Law. It is based on her recent article, “Corporate Governance Guidelines: How to Improve Disclosure and Promote Better Corporate Governance in Public Companies,” recently published in The Florida State University Law Review and available here.